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Housing Escrow Fund – Cause for Serious Concern

The Housing Escrow Fund is a fund pool comprised of fund contributions by developers who opt to comply with the legally mandated balanced housing requirement via certain alternative modes of compliance.

Under the law, a developer proposing to undertake a subdivision or condominium project is required to develop an area for socialized housing equivalent to 15% of the total area or total cost of the main subdivision project, or 5% of that of the condominium project, as the case may be.

As provided in the law, developers may opt to comply with this requirement in any of the following manner:

  1. Allocating part of the main project area for development of the socialized housing component;
  2. Development of socialized housing in a new settlement;
  3. Joint-venture projects for socialized housing with an LGU, any of the housing agencies, another private developer, or an NGO;
  4. Participation in a new project under the community mortgage program.

Fund Source

The revised implementing rules (IRR) of the law added two other alternative manner of compliance:

  1. Percentage of Investment Compliance (PIC), wherein the developer can indirectly participate in projects undertaken by third parties, by contributing funds amounting to at least 25% of the required compliance percentage – i.e. only 3.75%, or 1.25%, as the case may be.
  2. Incentivized Compliance (IC), wherein the developer can participate in projects of LGUs or the BALAI Program of the Key Shelter Agencies, by contributing funds amounting to at least 20% of the required compliance percentage.

Under either alternative, the developer’s participation is non-saleable and non-recoverable – meaning, that the developer acts merely as a fund contributor, and is not entitled to any share in the proceeds of the third party’s project.

A developer opting for either alternative is required to execute an Escrow Agreement, and deposit the total amount of his participation in an escrow account, whereupon he will be issued a Certificate of Provisional Compliance as a prerequisite for the issuance of the Certificate of Registration and License to Sell.

The combined developers’ deposits, then, comprise the source of the Housing Escrow Fund – the allocation and disposition of which is under the discretion of the Department of Human Settlements and Urban Development (DHSUD).

Fund Utilization

Under DHSUD Department Order No. 2021-004, the Escrow Fund is to be allocated for the following:

  • Land development under the DHSUD’s BALAI program;
  • Housing for AFP personnel, street children, indigent elderly and people with disability;
  • Rehabilitation of calamity-stricken communities;
  • Land acquisition for social housing in calamity-stricken areas;
  • Improvement of existing open spaces in social housing projects, including institutionalization of urban agriculture, strengthening livelihood projects, provision of wellness programs and amenities, and installation of communication facilities; and
  • DHSUD administrative expenses, to the extent of 15% of the total Escrow Fund of the preceding year.

A draft Department Order in November 2021 proposed to add to the above list the following:

  • Evacuation centers or multipurpose buildings;
  • LGU housing projects for government employees;
  • Housing for PNP personnel;
  • Projects of homeowners associations in existing social housing sites; and
  • Other programs or projects that the DHSUD Secretary may approve.

Doubtful Legality

CREBA is of the view that the installation of the PIC/IC schemes is of doubtful legality, for the following reasons:

Clearly contrary to the letter of the law

Firstly, under the law, the required social housing percentage is 15% in case of subdivision projects and 5% in case of condominium projects. Under the PIC scheme, the percentage is reduced to only 3.75% or 1.25%, as the case may be.

Secondly, the use of 15% of the total escrow funds for administrative expenses of the Department is in violation of Section 31 of RA 11201, which provides that such expenses are to be funded out of budgetary appropriations under the General Appropriations Act.

Negates the intent of the law

The balanced housing provision was intended to accelerate the production of social housing stock – whether in terms of socialized house/lot packages developed, or sites developed or serviced – by making social housing development mandatory without unduly burdening developers.

Contrary to this legal intent, the reduced compliance rate under the PIC/IC scheme will considerably reduce the rate of production of social housing stock – particularly since, as evident from the enumerated uses of the Escrow Fund, many of those uses are not in the nature of socialized housing projects for the underprivileged as defined in the law.

In other words, the goal of producing as many actual social housing units in the shortest possible time is being sacrificed in favor of projects which, after all, may be funded by Congressionally approved budgetary appropriations or other legally sanctioned funding measures.

Extends beyond the parameters set by the law

Firstly, the PIC/IC schemes are not included in the modes of compliance specified by law, whether RA 7279 or the amendatory RA 10884. It is the legal tenet that an implementing rule cannot include what the law does not expressly or even impliedly allow.

Secondly, the term “incentivized” implies that the reduced compliance rate is meant as an incentive to developer participation.

However, this type of incentive is not among those enumerated in Section 20 of RA 7279 as amended; and thus, again, its grant via the implementing rule is contrary to law. CREBA submits that it was never the intent of the law to grant a lower compliance rate as an additional incentive, for it would have meant taking with one hand what the other hand gives.

The implementing rule rationalizes that the lower percentages are meant to compensate for the non-saleable or non-recoverable character of the PIC/IC scheme. The question arises: why come up with such non-saleable/non-recoverable schemes at all, when the developers have found little cause to rile against the saleable/recoverable schemes already provided under the law.

It bears noting that the incentives expressly provided by law were carefully considered to already take into account the burden imposed upon developers by the prescribed compliance rate, and compensate them accordingly.

Those incentives were a quid pro quo agreed upon between the proponents of RA 7279 – then Senator Joey Lina with the support of the Bishops-Businessmen Conference and the marginalized sectors – and the industry led by CREBA, in consideration of the latter’s assurance that it will not oppose the balanced housing requirement (known then as the social housing quota).

Thirdly, the PIC/IC schemes appear to be a means of generating and pooling funds – via the escrow deposit requirement for the participating developers.

However, nothing in the law authorizes the use of the balanced housing requirement to generate funds for whatever purpose. Section 42 of RA 7279 is clear as to the fund sources for socialized housing, and said section does not include the PIC/IC scheme or anything of that nature.

Furthermore, nothing in the DSHUD charter authorizes it to generate funds in this manner. True, Section 40 of RA 7279 directs the Department to assist LGUs in obtaining funds needed for urban development and housing programs in their localities, and RA 11201 empowers it to develop “mechanisms that promote the establishment of a self-sustaining housing finance and housing delivery systems.”

However, it is legal doctrine that the exercise of those powers must be consistent with existing laws, or must be subject to the parameters set forth in the applicable law – in this case, RA 7279 as amended, and in particular its balanced housing provision.

Danger of Misuse

The legal issues aside, the implementing provisions of the PIC/IC schemes pose the danger of becoming a temptation for graft or misuse of funds.

Firstly, participating developers are required to agree that they “may not necessarily be made a party and signatory to the memorandum of agreement on the allotment and utilization of the escrow deposit”.  This lack of transparency could serve as a curtain behind which unsavory elements could hide nefarious deeds.

Secondly, the Escrow Fund being a mere administrative creation, there seems little to prevent the rules being modified to allow its use for what may be doubtful ends.

In light of the foregoing, it seems clear that the PIC/IC schemes should have no place in the social housing program.

At first glance, it may seem favorable to developers, as it appears to be a more convenient and less costly way of complying with the law.

However, CREBA – having been the original proponent of the Social Housing Law (BP 220) and continuing to be a staunch advocate of a higher level of social housing production – believes that its membership would rather pursue the long-term vision than what is expedient.

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